PremiumFinance minister Nirmala Sitharaman has been widely commended for finally riding to the rescue of a beleaguered economy through a concerted effort at infrastructure spending – government capex is slated to increase about 24% over the next fiscal year. However, given the disruption caused by the pandemic and the dire need for public investment to crowd-in private investment in a scenario where the latter is still fighting shy, few have pointed the finger at the government for exceeding the fiscal deficit target for FY22 – 6.9% of GDP as against the budgeted 6.8%.
Or at the prospect of a relatively high fiscal deficit ratio (6.4%) for the coming fiscal; a deficit, that according to budget estimates, will have to be financed by a much higher borrowing of ₹14.95 trillion in FY23. And at a time when the Reserve Bank of India should, by all counts, re-focus on inflation control (read, be less obsessed about supporting the government’s borrowing programme).
Of course, the exceptional situation created by the pandemic is a major reason for the indulgence shown to the finance minister. But what has been lost sight of in all this is the short shrift given to a long-stated objective of fiscal policy in India: To put government finances on a sustainable path. Long-term.
As part of this effort, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, had been enacted to provide a legislative framework for the reduction of deficit and debt of the Central government to a sustainable level to ensure inter-generational equity in fiscal management and long term macro-economic stability. The FRBM Act, 2003 and the FRBM Rules, 2004, made under the Act that came into effect from 5 July 2004 mandated the central government to limit the fiscal deficit to 3% of gross domestic product by 31 March 2021 (initially by March 2008). It also called on the central government to ‘endeavour to limit the general government debt to 60% of GDP and the Central government debt to 40% of GDP, by 31 March 2025'.
But thanks to the pandemic setting nought to all growth assumptions, all these targets have been given the go-by. The net result is that hardly any attention is now paid to a document that constitutes a vital part of the Budget Documents – The Statements of Fiscal Policy as required under the Fiscal Responsibility and Budget Management Act, 2003. So much so that the document government states it is not proposing an amendment to FRBM law; nor is it making any fiscal projections for the year FY24 and FY25 in order ‘to ensure it retains the requisite fiscal flexibility to respond effectively to emerging contingencies till the pandemic-induced uncertainties ease’. However, in line with the commitment made in the budget for FY22, the government would pursue a broad path of fiscal consolidation to attain a level of fiscal deficit lower than 4.5% of GDP by FY26.
Sure, the unprecedented nature of the covid-19 shock meant the fiscal deficit, which had been on a declining path, shot up from 3.5 % of GDP in 2017-18 to 9.5% of GDP in RE 2020-21. And, it continues to remain high due to the impact of newer variants on the economy. But what is clear is that given the slow pace of the reduction in the fiscal deficit (warranted under the circumstances), it will be a long time before we reach even the revised target of 4.5% target. As for debt sustainability, the 60% target is a pipe-dream and likely to remain so for years to come.
Debt sustainability is important because government borrowings today have to be repaid by future generation taxpayers. Already interest payments have increased in 2022-23 by 16% over the previous year’s budget estimates and 38% since 2020-21. Today, nearly a fourth of the government’s total expenditure goes towards paying interest on past borrowings, up from a fifth in 2020-21. At this rate, what legacy are we building for our future generations?
Note that the term of this government ends mid-2024. So, it would be left to the next government to reach the 4.5% target in 2025-26. Note also that this would mean the BJP government that castigated the previous UPA for its fiscal profligacy will, in all probability, leave the fisc in as bad or a worse position than the United Progressive Alliance (UPA) did in 2014 when the deficit stood at 4.4% (though the number goes up when adjusted for various off-budget fudges that this government, to its credit, has not resorted to). Case of the best-laid plans of men and mice going awry - the 2008 crisis for UPA and covid for BJP?
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